Banks continue to feel PSD2 and Open Banking discomfort

Banks need to overcome trepidation toward Open Banking and the EU’s second payments directive (PSD2), say fintechs, while the UK’s implementation entity says banks should move on from compliance to competition to stay ahead.

“The future of banking is being rewritten right now, and if you’re an incumbent bank, it can be uncomfortable to watch,” said Nick Caley, vice president for financial services and regulatory at ForgeRock, in an email.

“As Open Banking and PSD2 take effect, it seems there is no aspect of the banks’ operations not being disrupted by better and faster delivery of improved customer outcomes. As a result, banks are facing the threat of losing customers because where they created the banking experience for decades, they are now on the rough end of banking expectations caused by rapid digital transformation of everyday banking.”

Keith Grose, international lead at fintech firm Plaid, added that digitizing an entire industry is a massive undertaking. “It’s up to fintechs and banks to work together to fulfill the true potential and promise of Open Banking. It’s important to note that banks and other FIs have as much of, if not a greater, opportunity to develop new digital financial services.”

According to a survey by Open Banking platform Tink, 39% of European financial institutions still see Open Banking as a threat to their business models. 56% said they were concerned customer loyalty towards banks will be significantly reduced because of Open Banking implementation. 61% of respondents said financial institutions which only do the bare minimum for compliance will be left behind.

The final deadline for compliance with PSD2 is September 14 and according to the Tink report significant challenges still remain for banks. Regulatory compliance (91%), and access to tech (91%) and talent (91%) top the list of barriers to embracing the Open Banking opportunity.

“The biggest obstacle for the September deadline is the redesign of so many customer journeys that now demand an increased level of authentication,” said ForgeRock’s Caley. “Combine that with an almost complete lack of awareness amongst the general public of PSD2 and there is certainly potential for increased frustration at poorly implemented strong customer authentication.”

New banking opportunities

A spokesperson from the Open Banking Implementation Entity (OBIE), the body responsible for overseeing the initiative in the UK, said the initiative isn’t happening simply because of regulatory mandates. “It is happening because there is a commercial opportunity. It is happening because there is an opportunity to make the financial infrastructure of a nation more efficient, more flexible and to serve customers better.

“Two years ago, Open Banking was regarded by many as a typical compliance exercise championed only by a handful of fintechs – more tech spend driven by compliance rather than business case or customer need. Banks are moving from compliance to competition and clearly some are really grasping the opportunity to innovate.”

On the fintech side, third-party providers believe the biggest barrier ahead is convincing customers. 51% of those asked in an EY survey stated gaining and retaining customer adoption would be crucial.

74% in the EY survey also believed new competitors will become increasingly important in the banking landscape, while 59% said they were reconsidering their strategy for collaborating with financial institutions.

For Caley, banks remain the largest and most trusted holders of customer account information out there. “By working closely with the fintech community, and committing resources to properly testing and developing new open banking use cases, they can not only retain their position but expect growth at the expense of digital laggards,” he said. “To achieve this technologically, banks are increasingly recognizing the value of collaborating with fintechs. This has even led to the white-labelling of fintech capabilities to deliver completely new digital banking offerings for established banks.

“Ideally, banks today must already be running AB testing across customer journeys with analysis of timers and metrics to measure the effects of changed authentication methods on customer experience. Given the wide array of modern methods of multi-factor authentication – which can be passwordless or biometric – there are plenty of opportunities for banks to be on the right side of delivering better banking experiences in September.”